Director’s Loan Tax Implications
Posted: Sep 14, 2017
Drawing out a director’s loan and its consequences
The time limit for the loan repayment of 9 months and one day, from the end of accounting time from which you borrowed company money is highly important as failure to do so will outcome in major tax repercussions that must be met. A supplementary Corporation Tax cost will be subjected on any unpaid loan amount remaining, this is recognised as S455 tax, at an amount of 32.5% for loans drawn from 6th April 2016, billed to HMRC.
This tax rate is allowed to be reclaimed once the full sum has been refunded back into the limited company. It is imperative to note that regulations and tax legislations around director’s loans are extremely complex and any reimbursements on tax charges must be within nine months once the loan has been repaid. Refunds are sometimes a long procedure and can take years to reach the suitable criteria.
You must additionally take into account that if you in debt to your company £10,000 or more in the use of a directors loan, this will be seen as a benefit in kind or ‘beneficial loan’ as it is fundamentally an interest-free loan. Your company’s P11D would need to log this, along with the cash equivalent value of the director’s loan on your PTR (personal tax return) a,k,a your self-assessment.
The cash equivalent worth of a director’s loan is based on HMRC’s certified rate of interest for beneficial, which is 2.50% for the tax year of 2017/18.
You will need to pay National Insurance and income tax, based on this national interest rate on the cash equivalent value of this loan; for example, if you had a loan of £20,000, the cash equivalent of the director’s loan would be £500. An expense of Class1A National Insurance on the loan, at a rate of 13.8% of the cash equivalent value, would be £69, and the personal tax liability for a basic rate taxpayer would be 20% of the cash equivalent value, or £100.
You could possibly dodge these tax obligations by paying the interest on your loan equal to or above HMRC’s rate. Using the example above of the £20,000 director’s loan, this results in paying the cash equivalent of £375 in tax.
Would it be possible to dodge a director’s loan if it can’t be paid back?
Many directors who chose to take a director’s loan intent to pay it back, yet in spite of this there are certain factors that play a part of this that are un controllable such as not being able to find a contracting role, unexpected termination of a contract or a sudden personal emergency, then subsequently the company profits may decrease and the director may not have enough funds to repay the loan.
However, it is feasible for a company to clear an overdrawn director’s loan account, or ‘release’ the loan, by allocating a dividend if there are funds available in the company’s business account.
If this act has been chosen the loan will be believed to be a dividend under the Income Tax (Trading and Other Income) Act 2005. However, HMRC could pursue to collect NIC (National Insurance Contributions) if it disputes that the company was, in fact, arranging salary or compensation to the director who obtained the director’s loan. A company is categorically not able to accept Corporation Tax relief on a cleared director’s loan. Unpredicted situations many occur where you may not be able to reimburse a director’s loan, therefore because of tax consequences involved it is sensible to only withdraw a director’s loan if you definitely need it or in an emergency.
As you may realise, dealing with a director’s loan can get extremely complex very quickly. Our recommendation is to have a conversation with one of our skilled accountants who understand the penalties of taking out a director’s loan. Receiving guidance of a UK contractor accountant will allow you to make a knowledgeable decision and if assign a professional contractor accountant, they can assure you are navigated safely through the implications of a director’s loan.
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